Thursday, May 28, 2015

Time to Think Retirement

One of the questions I got from last week's quick questions (click if you haven't answered, I'm still reading responses) was to talk about how early to start saving for retirement. There is a very simple answer: as early as possible. That said, I thought it would be much much easier to give you a nice visual and some numbers.

So I decided to profile three investors. But to level the playing field, I gave them all the same income levels: $51,939, which was the median household income (note: household, not salary) from 2013. I gave them all the same investment strategy as well - invest 15% of your total household income into stock-based mutual funds over a long-term investment target. Finally, I gave them all a 9.3% annual return, which is the fifty year average on the stock market. The only variable in their investment strategies was when they started investing.

If you see the graph above, you can tell that Investor 1 (we'll call her Jane) ended up better off than Investor 2 (Bob) or Investor 3 (Sam). You might not be able to tell from the graph, though, how much better off she ended up, so here are the hard numbers.

Remember, all three invested 15% of their income and never got a raise their entire lives. That's a stupid assumption, but again, just leveling the playing field for time.

Jane started investing 15% right out of college at 23 and at 67, had $4,359,743.49. Take a hard look at that number, and think about the fact that even if the assumptions are WAY off, Jane is still a millionaire. No question about it.

Bob waited a little bit to get started and did not bother with his investment strategy until he was 35. Still, at 67, he retired with $1,461,084.03. Still a millionaire in his own right, assuming that all of my financial assumptions are perfect. Though, if I were the investor, I am not sure I would bank on my math and assumptions being spot on.

Poor Sam did not start investing until 45, though I will let you and the tabloids surmise the reasons why. Regardless, Sam ended up clearing just over half a million dollars (with my assumptions intact), with $556,404.92 at 67. While not so far behind Bob as to cry tremendously, when Jane's yacht goes sailing by, Sam may have second thoughts about how the money was spent forty years prior.

These numbers are not your numbers. But the variable of time is constant, and you will find that no matter what your rate of return or your salary or investment percentage, the retirement key is: The earlier that you can get investing, the bigger the return. How is your investment strategy panning out? Do you have one